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Gold/Mining/Energy : Big Dog's Boom Boom Room

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To: Ed Ajootian who wrote (96719)	2/13/2008 9:37:39 AM
From: seriousinvestor	Read Replies (4) of 206305

I also recently stumbled on these E&P MLPs. I used to own a lot of Canroys (I'm retired and I need the income) but they have been very disappointing of late and are likely to disappear after 2011 when the Canadian tax laws change. These entities(there are 9 that I know of-ATN,BBEP,CEP,ENP EVEP, LGCY, LINE,QELP &VNR) are legally MLPs(and therefore tax exempt) and they function exactly like Canadian Trusts(i.e unlike Amroys like SJT they can issue units, borrow money,buy and sell properties etc).IMO they are far superior to Canroys(at least for US taxpayers) for the following reasons: There is no 15% withholding on distributions; a portion of each distribution is classified as return of capital so that there is no current tax due(the untaxed portion reduces your basis until it get to $0-thereafter I believe the distribution would be considered ordinary)(the % that is tax deferred varies for each entity-the lowest BBEP is around 50% and the highest LINE is around 100% but the average is around 80%);they typically hold mature long life properties and the RLIs(which vary for each entity) are generally higher than the typical Canroy(LINE's for example is 21 years); the distributions are relatively secure(at least in the near term) since they all hedge a significant portion of production(LINE of example is over 90% hedged for '08' production) for the next few years(most use a combination of swaps and puts so they have some upside potential) and finally most have a history of periodically increasing the distributions as they acquire new properties(although none have been public for very long so the history is somewhat limited). There are of course negatives. Some that I have uncovered are: they are all relatively small(LINE which I believe is the largest has an EV of less than $5B but most are under $1B); although some (LINE) do not-most have IDRs so that the GP's initial split(typically 2%) increases as the distributions increase(I think BBEP has the highest split which at its maximum is 25%); distributions are paid quarterly not monthly. The biggest issue is that almost all of them have performed horribly in past 6 months(LINE for example has gone from around $35 to a bit under $20). I'm not sure why the performance has been so poor(it is not because of distribution cuts-in fact they are all increasing them-LINE just announced a 10+% increase). The prevailing wisdom is that most of them have issued a lot of units in private placements(called PIPES). The buyers of those units(who bought them at a discount from the then current market price) have all gotten creamed. These transactions typically have a lock up period so the units are not freely tradeable for something like 6 months. Those lockups have been expiring and the overhang is very considerable(in some case more than the entire public float). Presumably this issue becomes less important over time but whether or not it is still a problem is just a guess. The distributions generally have a lower yield than the typical Canroy but with the significant drop in the market price(which has been far more than the distribution increases) the yields are getting very attractive(LINE for example now pays an annualized $2.52(assuming no changes in the current rate) and that approaches 13%(all of which is tax deferred). One final caveat- the distributions are not dividends and are not reported on 1099's. You are a limited partner and get a K-1 in which you report your pro rata share of the partnerships earnings which may bear little relationship to the distributions you received. The k-1 does complicate your tax return(but if you already use an accountant that should not be an issue). Moreover, these investments are not suitable in a tax deferred account because they generate UBIT which is taxable even in an IRA. I have been trying to decide which of the 9 are the best investment vehicles. So far I've purchased half positions in LINE & ENP. I intend to buy more when I'm more confident that the market prices have stopped falling. I'm also looking to add 2 more and would appreciate recommendations. One final note, it appears that NG prices are firming up and even though a lot of the production is hedged this will only be a positive. Hope this is of some use.

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